According to Winterflood (Wins), the sector average discount to NAV ended 2017 at 3.3%, a historically low level, and well below the 5.1% average just 12 months earlier. To put 2017’s figure in historical context, since the end of 1989 the long-run average discount for the investment trust sector has been 9.4%.
“The stability of the sector average discount last year is particularly notable and reflects, in our opinion, benign market conditions that were characterised by historically low levels of volatility,” said Winterflood analysts in its 2018 outlook of the year.
Indeed, the number of trusts trading on premiums or around NAV rose in 2017 from 97 to 117, representing 36% of the sector.
However, with 2018 marking the 10th anniversary of the global financial crisis, and with the bull market now entering its ninth year, Winterflood has warned discounts could widen again in the event of a market downturn.
“The investment trust sector has enjoyed a strong period of growth and while this could continue in 2018, we believe that the current discount levels present a risk should or when the market sees a downturn,” it said.
In addition to narrowing discounts, Winterflood notes another feature of the sector in recent years has been the the number of new funds launched. It estimates that since 2008 there have been 113 initial public offerings across sector, many of which have offered exposure to alternative asset classes with attractive levels of yield.
Misunderstood risk
However, while in the main these funds have performed well, Wins believes some of the risks involved in the respective asset classes may have been “misunderstood or underestimated”.
“The current situation in the infrastructure sector is a case in point,” it says. “Political attention was focused on the sector last year following a speech by John McDonnell, the shadow chancellor, while the recent demise of Carillion has called into question the whole premise of PFI/PPP.
“The attraction of infrastructure funds has been their ‘uncorrelated’ yields and we suspect that they have in some instances been bought as bond proxies. We continue to believe that the asset class has merits but are concerned that some shareholders may be waking up to the reality of what they own.”
As a result, Winterflood forecasts that fundraising will prove more difficult in 2018, after a record last year. Indeed, 2017 saw the highest levels of issuance in the investment trust sector for 10 years, with £9.8bn raised, an increase of 77% on 2016.
“The infrastructure sector is unlikely to see further fundraising while it remains in the spotlight, particularly those mainstream funds exposed to UK PFI/PPP,” it says. “Demand for property could continue, especially for more specialist mandates such as social housing, while bond and credit sectors could also see demand.”
